The Relationship Between Inflation Rate and Nominal Interest Rate in Bolivarian Republic Of Venezuela: Revisiting Fisher’s Hypothesis

Stability of economics over the world represented by understanding the relationship among the interest rate and inflation rate. This paper investigates the relationship between inflation rate and nominal interest rate based on Fisher equation, using a monthly frequency data in case of Venezuela between 1/1/1990 to 31/12/2016. The Dickey Fuller (ADF) test and Phillips-Perron (PP) test both have empirically used to check the unit root. Also, Johansen for Co-integration test is exploited to study the equilibrium relation for long run between the inflation rate and the nominal interest rate in the time series data. The result shows that both variables are non-stationary at Level I (0) in both tests (ADF and PP), after converting the variables to first difference I (1) with taking the log both of interest rate and inflation rate become stationary. The Johansen co-integration null hypothesis is failed to be rejected in both tests Trace- statistics test and Max-Eigen statistics. This means that the long-run equilibrium relation between the inflation rate and nominal interest rate in Venezuela during 1990 to 2016 is not existed, i.e. the Fisher hypothesis does not hold through the sub-period in Venezuela.